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Transparency and Liquidity: A Comparison of Auction and Dealer Markets with Informed Trading

Year: 1996

Type: article

Abstract: ABSTRACT Trading systems differ in their degree of transparency, here defined as the extent to which market makers can observe the size and direction of the current order flow. We investigate whether greater transparency enhances market liquidity by reducing the opportunities for taking advantage of uninformed participants. We compare the price formation process in several stylized trading systems with different degrees of transparency: various types of auction markets and a stylized dealer market. We find that greater transparency generates lower trading costs for uninformed traders on average, although not necessarily for every size of trade.

Source: The Journal of Finance

DOI: 10.1111/j.1540-6261.1996.tb02695.x

Authors: MARCO PAGANO, AILSA RÖELL

Institutions: Université Libre de Bruxelles, Stockholm School of Economics, Economic and Social Research Council, London Business School

Language: English

Topic: Financial Markets and Investment Strategies

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: hybrid

Estimated APC paid: $4,430

OpenAlex ID: W2113551185

FWCI: 31.96

Cites: 29

Cited by: 545

Related to: 10